Domestic Airlines In Focus After Crash. Here's What The Biz Needs

The country’s travel market has been cited in the past as one of the major drivers for growth in Asia, and is expected to expand more rapidly than other regions in the world over the next decade. International airlines have been trying to enlarge operations here, in a bid to grab a piece of the ballooning pie of this traffic.

Regulatory issues, including controversies over international bilateral agreements, concerns over domestic fuel prices, and hiccups being faced by regional connectivity programmes, have, however, ended up as hurdles to the pace of growth in recent years.

Bilaterals: Foreign & Domestic Carriers

As far as bilateral air agreements are concerned, there is a growing demand by foreign airlines for expansion of capacities. This is being resisted by the government, since it seeks to ensure that domestic airlines can utilise their share of passenger capacities specified under 'bilaterals'.

The differences between foreign and domestic carriers were aired recently at a conference, where Indigo CEO Peter Elbers defended what were described as India’s protectionist policies in the aviation sector.

He sought to point out the historical imbalance of foreign carriers deploying higher capacity for Indian destinations while domestic carriers lagged. The comments were in response to other airlines' views that India’s ambitions for developing hub airports were not compatible with restrictive policies for foreign airlines. 

On the bilaterals, there is no doubt that efforts are being made to provide a conducive environment for the growth of domestic airlines, which have made large numbers of aircraft purchases in recent years. If bilaterals are expanded for foreign carriers, it would become a stumbling block for the growth of these airlines.

Domestic Airlines' Growth

In this context, one must recall that Air India and Indigo stunned the aviation world by booking the largest single orders ever in 2023. The two airlines placed orders for 970 aircraft worth US$ 120 billion at the time, but the total planes on order for Indian carriers is now much larger, at around 1,700.

The airlines are clearly gearing up for the galloping demand that has been projected for this country in the coming years. Already cited as the world’s third-biggest domestic aviation market, it is expected to expand rapidly as an affluent middle class is increasingly taking to the skies.

According to the Airports Council International (ACI), India will surpass China in passenger traffic growth rate by 2026. For the five years from 2023 to 2027, it has estimated the compound annual growth rate for air passenger traffic to reach 9.5 per cent, compared to China’s 8.8 per cent. India is also expected to be the fastest-growing global market during 2023-25, at 5.5 per cent. 

At the same time, one must view the domestic aviation industry in the context of the enormous size of this sector in advanced economies. For instance, the number of commercial planes in this country has risen from 400 in 2014 to about 840 currently.

On the other hand, the US-based carrier American Airlines alone has a fleet of 1,500 planes, while the total commercial aircraft in that country are estimated at 7,000. The domestic industry has a long way to go before it can truly be considered a competitor to global airlines.

Fuel Prices & Other Issues

Yet, the comparison with the international airline industry must also take into account the fact that aviation turbine fuel prices are much higher in India than elsewhere. One reason is the imposition of taxes not just by the Centre, but also by state governments. The proportion of taxation in airline tickets is estimated at as much as 45 per cent.

According to Civil Aviation Minister Ram Mohan Naidu, some states like Tamil Nadu levy a value added tax (VAT) of 29 per cent on ATF. This imposes a heavy burden on airlines, as well as passengers, as it translates into higher ticket prices. 

Petroleum products, along with alcohol, have been kept out of the purview of the Goods and Services Tax (GST), largely due to states' concerns over revenue inflows. At the same time, this means that these products can be used as cash cows to supplement falling revenues from other sectors.

The long-term solution is obviously to bring both crude and petroleum products under GST, but it requires great political acumen to get a nod on this issue from both BJP and non-BJP-ruled states.

The need for greater regional air connectivity is also one of the biggest challenges in this sector. The present government has committed to provide cheaper fares so that the common man can ultimately have the comfort of travelling by air.

Linking Tier 2 & 3 Cities

To achieve this objective, efforts have been made to build up airport infrastructure by developing 50 airport projects over the next five years. This will add to the operations of the existing 159 airports. 

Even more important is the UDAAN scheme that aimed to bring Tier 2 and Tier 3 cities within the ambit of air travel. It took off well initially, but has had a patchy record of implementation. The biggest problem has been providing subsidies to airlines that are prepared to service smaller metros.

The result is that some remote state capitals like Itanagar in Arunachal Pradesh are now accessible by air, but others are still off the grid. Regional connectivity thus remains a work in progress. 

The Air India crash in Ahmedabad has put the spotlight on the burgeoning aviation industry in the country, which has been trying to overcome several obstacles in the way of sustained growth. It is now time, however, for both industry and government to put the focus on safety issues before all else.

While Air India will come under the scanner, the Directorate General of Civil Aviation (DGCA) must take steps to ensure that safety becomes a priority for the entire gamut of the aviation industry.

Rapid growth must be accompanied by stringent adherence to safety and security norms. Only then will it be possible for Indian carriers to become global leaders in aviation.

(The writer is a business journalist and columnist. Views are personal)